Prudential Regulation Authority Rulebook

5.1

Any mutual with-profits waiver application will list the rules which the with-profits mutual wishes to be disapplied to its members’ fund. This may include rules which rely on the definition and scope of a with-profits fund.  

5.2

Both the PRA and FCA will need to approve any application to modify the definition of ‘with-profits fund’ by a dual-regulated mutual. When considering such an application each regulator will therefore consider whether it meets the statutory tests in s138(4) FSMA, which includes consideration of whether the waiver would adversely affect the advancement of each regulators’ statutory objectives. 

5.3

The PRA and the FCA have a statutory duty to ensure a co-ordinated exercise of powers when reviewing waiver applications ^[7]; the PRA recognises the importance of co-ordination between both organisations, as highlighted by respondents to CP12/38. 

5.4

For the purposes of its regulatory decision-making, the FCA expects to agree with the firm applying for the waiver, the selection of an independent expert, and the drafting of the expert’s terms of reference (in consultation with the PRA). Since the appointment of such an expert is likely to occur early in the consideration of whether to apply for a mutual with-profits waiver, firms should send the application and all supporting documentation to the FCA in the first instance. The FCA will then forward the relevant information to the PRA. Where the PRA and FCA are each satisfied that the requirements of section s138A of FSMA are met, each regulator will approve a mutual with-profits waiver and issue a waiver direction, usually as a joint PRA/FCA waiver direction. 

5.5

Before the PRA grants a mutual with-profits waiver it will consider whether the statutory tests are met; that compliance with the unmodified rule would be unduly burdensome or would not achieve the purpose for which it was made.

5.6

As set out above, it will also consider whether granting a mutual with-profit waiver will affect the advancement of both its general and insurance objectives.

5.7

Supporting material that the PRA expects the firm to supply includes, but is not limited to:

• A medium-term business plan, based on credible estimates of new business volumes and profitability.
• How the new business written in the members’ fund will provide for the risks of that business, taking particular account of the fact that the with-profits rules in the FCA 
  Handbook and the PRA Rulebook will limit the extent to which funds within the with-profits fund will be available to support those risks.
• How new product offerings will be sustainable. The PRA will expect the business plan, at least for the early years, to be based around products which the firm already provides or for which it can demonstrate relevant knowledge and expertise.
• Projected capital requirements for the firm as a whole and how it will meet those with capital of an appropriate quality.
• Evidence to demonstrate how any distributions, dividends or other payments in respect of members’ rights will affect the financial and capital position of the firm.

5.8

The PRA recognises that the provision of such evidence, and thus the ability to show that the grant of a mutual with-profits waiver will meet the statutory tests, may not be possible for all with-profits mutuals. In such cases, the best outcome for the firm, from the point of view of safety and soundness and benefit security for policyholders, might well be for that firm to go into run-off.

5.9

While the PRA aims to consider mutual with-profits waiver applications as promptly as possible, the time which it will need in order to reach a decision on an application will in practice depend on the quality of the original submission and the complexity and circumstances of the specific case.

5.10

The PRA expects that the granting of a with-profit mutual waiver will allow with-profit mutuals to restructure and change their business model. Such actions necessarily have long-term implications; it is unclear how such a decision could subsequently be reversed. The PRA therefore understands the importance of permanence, as raised by respondents to CP12/38, or at least certainty over the longer term, when a waiver is granted. The PRA agrees with respondents to CP12/38 that a waiver with duration similar to that of a firm’s remaining with-profits business is desirable, and expects that a waiver of such length may be granted. However, this must be balanced by the fact that it is not appropriate for the PRA to fetter its discretion in relation to its statutory power to revoke a waiver, nor to cease to monitor the continued appropriateness of the waiver in the context of the PRA’s objectives. Therefore the PRA retains the right to agree a shorter waiver if more appropriate to the circumstances of the application.

5.11

Several respondents to CP12/38 suggested that any solution to allow with-profits mutuals to recognise a mutual members’ fund should be available regardless of whether the with-profits business is in run-off.

5.12

The PRA will consider whether an application meets the PRA statutory tests for a with-profits mutual waiver regardless of whether the firm is in run-off or not, subject to the application process described from paragraph 5.2 above.

5.13

The PRA will consider the impact of a firm’s proposals on its objectives and firms should be able to demonstrate, in particular, that policyholder benefits will be sustainable immediately and for a period after the waiver. Therefore, when considering a waiver application, the PRA will be mindful of the risks that current and future policyholders in both parts of the firm might face.

5.14

Firms will be expected to demonstrate in a waiver application that the business plan shows that the proposition can deliver capital commensurate with the business and its risks. The higher the risk attached to the new business, the higher the related capital requirement will be. If that part of the common fund which would be identified as the with-profits fund gives rise to a ring-fenced fund under Solvency II (see paragraph 6.2) this would mean that the elements of capital requirements relating to the separate members’ fund will have to be met from that members’ fund; they cannot be met from within the with-profits fund.

5.15

In addition to this, firms are prohibited from undertaking business unless they have been granted the appropriate permissions. Any request to vary permissions will be considered according to the PRA’s existing procedures for variation of permissions in the context of the firm’s capabilities and governance arrangements.

5.16

Firms should expect supervisors to review continued appropriateness, including progress against business plans, in line with the PRA’s supervisory approach. The PRA has the power to revoke a direction giving a rule waiver at any time if the firm no longer meets the statutory tests for the grant of a direction, or the direction is no longer appropriate for other reasons.

5.17

The PRA expects firms to meet the new business plan targets. If a firm fails to meet these and the PRA considers that this failure did, or could, adversely affect the safety and soundness of the firm or the benefit security for policyholders, then revocation of the waiver would be one of a range of supervisory responses available to the PRA (recognising that once the mutual had restructured it is unclear how any separation between the with-profits fund and a separate members’ fund might be reversed). 

5.18

Should a waiver revocation be the appropriate supervisory response to such a situation, then the PRA will follow its published procedures for the revocation of waivers.